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Will Paytm’s Rollercoaster Hit IPO Gold?

Last fortnight, Paytm opened India’s biggest IPO.

Small Town Boy with Wanda Vision

Vijay Sekhar Sharma always wanted to be an entrepreneur 

VSS graduated with an Engineering degree from Delhi after completing his schooling in a small town in rural Uttar Pradesh

He faced initial difficulties in coping up with English as a medium of instruction and learnt English by listening to English songs and watching English movies. Not happy with being a salaried employee, VSS set up One97 communications, along with two other friends in 2000

This is post the 1999 dot-com bust when mobile was just making inroads into India.

One97 started as a mobile value-added services firm that aimed to bring the content available on the internet onto SMS. Slowly, the gamut of services offered increased from news, ringtones, jokes to exam results, cricket scores, music and news also. In addition, VSS continued to do odd jobs on the side to help with the company cash flows. 

The diversification of businesses would be a recurrent theme across VSS’ journey.

Around 2004, he got his first angel investor and by 2007, One97 had raised its first institutional round. 

By 2009-10, 3G services on mobile became the catchword and VSS decided to build a product which would allow consumers to Pay Through Mobile (PayTM). 

PayTM was born in 2009 as a payment service that allowed prepaid users to top up their mobile accounts and also shop using their bank accounts and debit cards. 

Around this time, individual telecom companies were already offering online recharges through their individual websites, but PayTM allowed a person with connections from multiple vendors to pay at a single place. 

At that time, Indians were very conservative with paying online. The “semi-closed” wallet fulfilled a need wherein it allowed individuals to load money from their bank account into the wallet and then use the funds across multiple online or offline merchants. 

Users of a semi-closed wallet were not allowed to withdraw their balance in the wallet. However, they were allowed to transfer it to other wallets and to their bank accounts. The lack of this license limited PayTM’s growth as its customers could not recharge its wallet through cash and were not able to use the wallet at merchant establishments.

By 2013, PayTM received an RBI license for a semi-closed wallet, which enabled it to double down on its wallet adoption. They were now able to reach out to merchant networks and service offerings. 

This was essential if they had to compete with Airtel Money, which had a presence in every nook and cranny of the country via its telecom recharge shops. 

The license and the aggressive reach allowed VSS to envision PayTM as a “mobile-first” digital payments platform with a view to enabling cashless payments for all Indians. This vision was on its way to fruition with the launch of the PayTM wallet app in 2014.

An epic story was about to unfold.

The Incredible PayTm Wallet

The initial use-cases of the PayTM app were limited to mobile top-up and utility bill payments.

As was the case with One97, the expansion of use cases was driven by an idea that a customer should pay by PayTM whenever she wanted to make a payment. PayTM studied the lifestyle of customers and ensured that every use case was covered.

In 2014, the Reserve Bank of India, India’s central bank, mandated that all online card transactions must have two-factor authentication. The regulation meant that a one-time password (OTP) was sent to a customers’ mobile phone for verification. 

The regulation was new friction for Uber customers, the newly scaling ride-hailing service.

Uber customers were not able to seamlessly pay for their rides as they had done before. PayTM stepped in, formed a partnership that allowed Uber customers to pay for their rides via their PayTM wallet 

The Uber integration would turn out to be the first big boost in the PayTm roller coaster, almost making it urban mainstream.

Buoyed by the success of this partnership, PayTM tied up with other cab and auto providers such as Meru and Jugnoo.

By 2015, PayTM launched a P2P fund transfer service between the wallets of two PayTM customers free of charge. It had previously added bus tickets as a service offering. 

Slowly it moved into hotel bookings by tying up with online travel companies and tour operators. This was done with a view to deepening its presence in Tier-2 and Tier -3 cities. In addition, the industry margin for hotels and travel packages was much higher at around 15%, versus ride-sharing.

In 2016, PayTM allowed for flight bookings which had a margin of 7%. PayTM also tied up with government-owned IRCTC to allow for train bookings and ordering for meals on trains. 

A similar strategy was behind PayTMs move into entertainment, public and government sectors (toll tax payments), fees payments to educational institutions.

The intent was to create a wedge in consumers’ minds to use Paytm for all their payment needs.

At this point, PayTM was morphing into a Payments “Super App”, or a one-stop-shop for all payments. 

This was heavily inspired by Alibaba and WeChat in China. VSS was already enamoured by the monetization possibilities of the “super app”. It was only a matter of time before Alibaba and Ant Financial came in as investors for its next round. 

Alibaba used e-commerce as hook to build an ecosystem around it, while Paytm planned to use the wallet as a hook to build an ecosystem around it. 

With super app dreams, a super disruption was about to hit Indians

Hammer of Demonetization

In November 2016, the Government of India announced Demonetization. 

INR 500 and INR 1000 currency notes were declared illegal, the largest denomination of currency notes in India, with immediate effect. 

This was a huge disruption to daily Indian lives, with long term repercussions. For the newly minted unicorn Paytm, this was going to be the opposite of a disruption.

All across the country citizens had to use either plastic cards or rely on digital modes of transfer for almost all transactions. From the smallest of villages to the largest of cities, everyone started to use Paytm. 

The next day, in the leading dailies, PayTM had a huge front-page campaign, championing the use of Paytm. 

Before Modi Ji’s posters were mainstream PayTm did it, in a borderline grey manner.

Demonetization enabled PayTM to grow its user base exponentially. PayTM claimed a record of 5M transactions a day on Nov 12 and Nov 13 along with a 100% growth in wallet balances. 

Talk about a Govt. decision bringing virality for a startup.

The growth in user base, courtesy of demonetization, was made possible because of the investments that PayTM had made in developing brand equity and a connection with consumers. 

PayTM sponsored the Indian Cricket Team and embarked on advertisements during the Cricket World Cup in 2016. When the app downloads increased, PayTM doubled down and spent heavily on advertising during the Indian Premier League (IPL). 

VSS commented that the association with Indian cricket enabled Paytm to reach remote corners of the country. This was a strategy that would be used by a stable of unicorns to come.

The merchant ecosystem accepted Paytm after this association. This national brand-building exercise was topped up with local advertising in the cities where merchants were onboarded. These branding exercises were helpful in etching “Paytm Karo” in the mind of the Indian consumer. 

Paytm now had a widely used wallet which was a hook to get into the customer’s wallet (literally). It was now in search of a business model that would monetize its massive user base. 

This search seemed to be answered almost immediately.

RBI gave approval to a new type of bank called the payments bank, that could accept restricted deposits of up to INR 1,00,000 per customer. The objective behind introducing payment banks was to enhance digital, paperless and cashless banking. 

Paytm launched its payments bank in May 2017. It announced that all customers with Paytm wallets would be transferred to the Paytm payment bank. 

A new age bank, built from a wallet.

The payments bank started with offering savings and current accounts, FDs, and digital and physical debit and credit cards. As was now classic Paytm, the payments bank kept adding more products to gain a higher share of the customer’s wallet. 

Over time Paytm Payments bank started offering wealth management services, mutual fund transactions, gold and instant bank settlement for its merchants. The initial response to the payments bank was lukewarm among the PayTM wallet customers. This was because of high vertical competition in each of the segments where Paytm entered into.

Paytm was riding huge tailwinds, but early signs of a slowing juggernaut were beginning to appear.

An Infinity War of Businesses

The single, simple, wallet as a hook for Paytm had worked wonders. 

Paytm emerged out of demonetization as the biggest beneficiary, the company was clearly scaling rapidly. 

In 2017, Paytm became India’s first payment app to cross over 100 million app downloads. After demonetization, Paytm integrated the BHIM UPI to increase its user base. 

Shortly after that, Paytm touched a new record of 70 lakh transactions. 

Paytm announced in 2017 that the mobile wallet company had clocked INR 5,000 crore worth of transactions, which meant 200 million transactions in terms of volume. The company was reaching new heights.

As it continued to search for monetization beyond its core wallet model, it tried to get closer to the Alibaba super app.

Paytm launched Paytm Mall in 2017 as a standalone app and entity. The Paytm Mall was a new version of its three-year-old e-commerce arm and offered a combination of the mall and bazaar concepts to Indian consumers.

The launch of the Paytm Mall coincided with Paytm raising a new round at the demerged entity that would give a combined majority stake to Chinese e-commerce major Alibaba and payments affiliate Alipay.

The e-commerce bet was a big one. Paytm wanted to make it the third big online commerce ecosystem in India, alongside Flipkart and Amazon India. 

In Feb 2018, Paytm launched casual gaming Gamepind along with Alibaba backed gaming company AGTech Holdings. In June 2019 Gamepind was rebranded as Paytm First Games (PFG), at the time the platform had 30 million registered users and clocked INR 20 crore in monthly Gross Merchandise Volume (GMV), with more than 300 games and quizzes for gaming enthusiasts.  

With this slew of diversification, VSS was now at the head of a company that has some 14 fully or partly owned subsidiaries, a joint venture, and multiple associate companies. 

Impressed by the speed of execution and the grandiosity of their vision, Paytm was able to forge some path-breaking new partnerships like the one with Berkshire Hathaway in 2018, becoming their first India investment. 

At that time the impact that UPI would have on their core business was unclear and probably a saving grace for the company. 

But the expansion into multiple use cases all over would start to show cracks.

Diversification Burn: Far From Home

Ideally, the diversification should have paid off as Paytm had a customer base of 100 million to cash on.

But with its core vertical proving phenomenally hard to monetise coupled with intense competition across all of the other diversified verticals meant the company was forced to pour money into cashback and marketing, making it hard to bring down its burn rate.

When you look at Paytm’s financials the true picture becomes clearer. From FY17 to FY 19 revenue grew 4.3 times to INR 3,391 Cr. in the same time period losses grew 4.5 times from INR 879 Cr. to INR 3,954 Cr.

Most of the diversified forays the company made were yet to mature to the point where they can make money. Paytm Mall was a prime example. 

Despite investing over $600MM the company failed to make any meaningful impact on the e-commerce landscape in India. In context, social commerce upstart Meesho had raised a similar amount but was rapidly scaling.

The rationale for launching Paytm Mall was to leverage the customer base acquired through the high-frequency use case of payments and monetise the base by going after the large commerce market. 

But this was definitely easier said than done.

Paytm hoped to take its cashback policy in payments and overlay it onto e-commerce to get customers transacting. The extent of this policy was evident from the fact that over $150 million the company spent during the Diwali season in October 2018.

However, the company failed to build a robust supply chain and competing in a market with 2 larger, equally well-funded players proved too daunting a task. 

Such was the fall in Paytm Mall that total visits dropped to 5.6 million in March 2019 from 45 billion in October 2018. From that point on the company focused on reducing burn, eventually bringing it down to $2 million / quarter.

Clearly despite all that capital invested Paytm Mall had little to show for it.

Paytm First Games was another example of an investment that has struggled to take off. In early 2020, PFG had a registered base of 28 million users. Across each of the gaming verticals, PFG lags competitors. 

Dream 11, India’s first gaming unicorn, is the clear market leader when it comes to Fantasy Sports. On the real-money gaming front, PFG lags MPL.

Recognizing the need to reign in losses, the company began focusing on improving profitability. 

This was evident in their FY20 financials. The company reported a marginal 1% fall in its revenues and a 28% decline in losses for FY20. While its revenues were down from INR 3,391 Cr. in FY19 to INR 3,350 Cr. in FY20, losses fell from INR 3,954 Cr. to INR 2,833 Cr. during the same period.  

In FY21 the company maintained this trend. Paytm’s consolidated revenue from operations fell 14% to INR 2,802 crore for FY21. Losses, however, narrowed to INR 1,701 Cr. in FY21, from a loss of INR 2,942 Cr. in FY20. 

Marketing and promotional spending were down 61% to INR 532 Cr. during FY21 from INR 1,397 Cr. a year ago. For 50M users acquired in FY21, it was a CAC of INR 100, down from a CAC for INR 300 for 40M users in FY20. 

Total expenses fell to nearly INR 4,783 Cr, from INR 6,138 Cr. in FY20. A painful lesson to grow sustainably was learnt

Captain PayTm: The First Super App

The challenges with Paytm Mall and PFG notwithstanding the company continued to pursue its aspiration of becoming India’s first super-app. 

A title many in the country coveted but, unlike in most eastern markets, nobody was able to command. 

In China, the super-apps started from use cases that were discovery led (Alibaba) or engagement led (WeChat). Layering in transactions was natural. In South-East Asia, few verticals had depth which lent itself naturally to one trusted horizontal player.

Paytm started as a transaction led use case that wanted to build discovery/engagement, which was hard. Similarly, it found a lot of competition in verticals, losing users. 

Its watered-down version of a super app was more focused on being financial, which is transactional in nature. 

In their IPO prospectus Paytm talked about how their users can conveniently fulfil a wide selection of daily life use cases thus enabling Paytm to be perceived as a super app.

Thus, enabling credit and providing wealth management offerings became key strategic areas for Paytm leading to the launch of Paytm Money in 2018 and the Paytm First Credit Card in 2019.

Paytm Money was launched as an investment and wealth management app that offered mutual fund investment products at zero fees and commissions along with up to 1% higher returns. At the time of launch, it already boasted 8.67 lakh registered users. 

The app was focused on expanding the base of mutual fund investors in India by leveraging a direct investment program that the mutual fund regulator (AMFI) had announced in 2013 but saw meagre adoption. While Paytm Money’s value proposition was certainly not unique and like its consumer-facing payments product, it was unclear how the service would be monetized. 

The Paytm Money service closed FY21 with INR 8 Cr. in revenue and 1.5 million registered users as of June 30, 2021. The lack of scale is no surprise given the limited differentiation on their app.

Following on the heels of Paytm Money, the company launched Paytm First Card (PFC) in mid-2019 in partnership with Citibank. Staying true to their cashback philosophy, the PFC was India’s first card with 1% universal unlimited cashback, with no restrictions on earning categories. The card was issued by Citi but sold by Paytm. 

The card also enjoyed a full waiver of an annual fee of INR 500 on spends exceeding INR 50,000 per year. Paytm customers could apply for the credit card on their Paytm app, where they could also conveniently track offers through the Paytm First Card passbook.

As the company expanded its suite of products and got closer to its ambition of becoming a financial super app the company raised a $1Bn financing round in Nov 2019. It had over 450 million registered users and over 100 million active users. 

Paytm’s constant search for a business model after the blockbuster wallet product was still on.

Business Model Search Forever

In a low margin business, it is hard to make money and one has to run it like a loss leader bringing an audience and then find other ways to monetise this audience through cross-sell.

That’s what VSS meant when he said “ Payment is a no-margin business. Money will be made on content, commerce, and advertising. And then, we will build financial services on top of that”

By 2021, Paytm businesses were facing intense competition if successful or showing signs of failure.

Paytm Mall was a poor performing business, which had led to a revenue of Rs 703 crore and a loss of Rs 479 crore in FY20. Under pressure from giants like Amazon and Flipkart, it had little to show for.

In the wealth management space, where Zerodha and Groww are market leaders by a huge margin, Paytm Money could not make much of a dent.

There was a reason why it would be a difficult space for Paytm to crack.

Investment is a serious business and customers wanted specialists to take care of their money. This trust came with Zerodha and Groww, where customers know the focus is on investment and a lot of other customers are using it, unliked Paytm which was used for payments.

Due to its huge base, Paytm Money had over 7 million users and has achieved an AUM of over Rs 5,000 crores.

While Paytm was focused on finding a new business model, the new UPI wave was captured by other players. As Paytm had created a beautiful hook through its wallet, newer players took advantage of the gap left by a giant to create a beautiful hook. 

PhonePe and Google Pay dominated UPI, with PayTm a very distant third.

Paytm Games, its gaming business, was the reason that led to Google and Paytm faceoff in September 2020 when Google decided to remove Paytm from Google play store on grounds of policy violation related to gambling.

While the app was back in a matter of a few hours, this did not go well between Paytm and Google, as Google Pay directly competes with Paytm. Paytm had reasons to feel that Google was making use of its monopolistic power.

By October 2020, Paytm was ready to fire back on Google when Google announced a new payment policy asking for a 30% cut from developers for all apps that go on the Google play store.

Paytm was quick to capitalize on the opportunity by launching its own mini-app store which allowed other apps to function within the Paytm app itself.

While it failed to gain traction that can be compared to Google Play store but it did put pressure on Google to review and hold the new policy and it was soon modified to more relaxed terms of 15% cuts down from original 30%. 

However, Paytm did strike Gold with Paytm Gold. An easy and convenient way to buy gold online that comes with transparency and without the hassle of managing physical gold.

Indians seem to be loving it with more than 73 million customers buying it on Paytm by 2020.

Paytm at a company level was fighting so many players across all their businesses, that, it is natural it needs a war chest to stay in the game

Paytm: IPO Homecoming

In all the competition and lukewarm outcomes, one thing was clear – PayTm was becoming a more efficient business.

Paytm had been using private capital from domestic and foreign investors but for an 11 -year old company it is obvious to think of raising capital through the public market as the next logical step.

The timing couldn’t be better with SEBI’s recent changes in IPO requirements making it easy for the Indian startups to list within India. Zomato’s blockbuster IPO opened the floodgates for Indian tech companies to list on Indian exchanges.

By October of 2021, Paytm got SEBI’s nod for INR 16,600 crore (roughly 2.2 billion USD) making it the biggest IPO India has seen so far.

The plan was to first raise a pre-IPO round of INR 2000 crore at a valuation of USD 20 billion, 25% up from its last funding round valuation of USD 16 billion which happened in 2019.

But investors did not bite.

A loss-making startup but a market leader in a winner takes all market, can command a price or margins later which can grow rapidly without putting much pressure on cost structure.

But then, the question is how much is too much? 

To give a structure for valuing a company like Paytm, which has a good chance to become India’s “Super App” and operating in multiple financial sectors, Ashwath Damodaran did give a good framework in his recent blog post.

Paytm did face the tailwinds of India’s mobile adoption, improved digital payment ecosystem and that led to a much higher market and mind share from 350 million users.

However, there has been a significant reduction in take-rate which is close to 0.79% in 20-21 showing increased competition. 

The problem here is that while Paytm is the market leader with more than half P2M (Person to Merchant) transactions enabled by Paytm, the P2P (Peer to Peer) segment has been lost to GPay/Phonepe where Paytm has around 11% market share.

The good news for Paytm is that with UPI becoming the default payment mode for Indian customers, monetization opportunities in the P2M segment seems to be much higher than the P2P segment. This lever Paytm can pull over the next few years to reach a target rate of 1.5 -2%, which at that scale, can be the game-changer.

Starting as a peer to peer wallet, it could be the merchants who could come to Paytm’s rescue. Another wild card that Paytm is holding on is changing from a Payments bank to a Small Finance Bank. 

What that change would mean is, as Payments bank Paytm cannot do lending but a small finance bank can lend. That’s a goldmine Paytm is sitting on.

Paytm’s post IPO journey could be built around its merchants and a massive user base.

Building a Multiverse of Fintech Madness

To understand how critical merchants could be, we talked to a Coconut Panni Walla

Based out of one of India’s Tier-3 towns and accepting payments through Paytm QR code, we asked how often does he withdrew money and does he know the commission charged by Paytm? 

Mr. Merchant gave us some interesting insights to understand a story beyond numbers.

Small merchants in India do not understand much about payment-what is happening and how it is happening. 

What they know is whenever they have to make payments to buy their raw material (here raw coconut) they go to their bank, withdraw money and come back. This happens typically 2-3 times a week.

Neither do they understand any charges of the bank nor the payment gateway. They want liquidity and access to credit to meet their working capital needs. If there is a charge, they build it in their offering which customers are ready to pay as we are talking of transactions of less than a $ and 2-3% change won’t matter.

That’s where Paytm has a huge advantage of bundling a lending product with the huge distribution of merchants it has built.

There are many opportunities to cross-sell but an active base of 50 million out of 350 installed user base, gives a little confidence to current investors that Paytm can be valued high enough for the cross-sell opportunity.

The non-financial businesses that it started since demonetization do not inspire confidence, and finance may seem to be the way Paytm goes.

Paytm’s rollercoaster started with value-added services in 2010, went up with its wallet business by 2014, scaled even higher in 2016’s demonetization, flattened as it added more lines in 2018, and started going down as competition and business sprawl started hurting a quasi-conglomerate.

But as it gets ready for India’s biggest IPO to date, there is a lot that could go right.

What we know is that Paytm IPO closed with 1.89 times subscription and at an upper price band of Rs 2150/- valuing the company at 1.39 lakh crores, or ~$20Bn.

Paytm, despite its random walks in other markets, is still “the” fintech giant. Its user base, both on merchant and retail is massive. It has a superb brand recall. Its first-mover advantage extends now to the IPO. 

Business fundamentals have also improved, despite the narrative of many loss-making businesses. Its last few years have solely been focused on deepening its financial services stack, which is in the right direction of cutting out flab.

VSS’ ability to will a company of this size from being a small-town boy 20 years ago is incredible. It would be stupid to take a bet against that ability just yet. 

Overall, believing in Paytm will be believing in India’s fintech story. At this point, there’s a lot of room to grow in a country that has exploded to 25Bn real-time transactions. Paytm’s could be entering the markets at a time when money is easily accessible.

They say it may be about timing, but that’s what building businesses are all about.

As Paytm’s rollercoaster enters the new decade, it looks to be putting the dips of the past behind to strike gold with its IPO.

Authors: Keshav, Nilesh, Varun, Abhinay Design: Mehak, Omkar